Businesses seek cure for health care cost surge

In this Thursday, Aug. 8, 2013, photo, Jeremy Merrin, right, owner of Havana Central restaurants, reacts to a television nearby as a worker prepares for customes to arrive in New York. Merrin said that while he supports healthcare reform, the current changes under President Obama will hurt small businesses like his.Associated Press

In this Thursday, Aug. 8, 2013, photo, Jeremy Merrin, right, owner of Havana Central restaurants, listens during a conversation with Rosalyn Rentas, general manager, in New York. Merrin said that while he supports healthcare reform, the current changes under President Obama will hurt small businesses like his.Associated Press

Associated Press

NEW YORK -- A year ago, Teresa Hartnett was on the verge of expanding her small business. The company had hit $1 million in sales, and requests from clients were flowing in. She planned to transition from nearly 30 freelancers to a full-time staff of 60 by 2014.

Then the reality of the Affordable Health Care Act hit. Hartnett realized she might not be able to afford to carry out her plan.

"At the end of that marathon of effort and sweat and stress, I'd face the impact of the ACA. I decided against it," says Hartnett, whose company, Hartnett Inc., transforms printed documents into digital content.

The expected surge in health insurance costs under the ACA has many small business owners changing the way they operate. For many like Hartnett, hiring and expanding is going on the back burner. Others expect to cut back on some of the services their companies provide, raise prices or cut employees' hours and bonuses.

The ACA requires that companies with 50 or more workers provide affordable health coverage for their workers. For many companies, that could mean higher insurance costs. And while the government has put off enforcement of the law until 2015, premiums for 2014 are expected to rise sharply because of the law's requirements.

A survey of owners taken last month by the advocacy group National Small Business Association found that 20 percent have held off on implementing a growth strategy because of rising health care costs. Thirty-six percent said they had refrained from raising salaries and 26 percent have held back on hiring.

Staying small

Hartnett was getting enough steady business that she was ready to take on 60 employees.

"I was particularly excited about offering benefits," she says.

That enthusiasm died when Hartnett met with her accountant to be sure she could afford the expansion. Hartnett was faced with the prospect that, once she had 50 workers, she'd be subject to the ACA. She considered expanding her company with part-timers who wouldn't be covered under the law, or keeping her staff below 50. But none of those options would help her meet the goals she set for her business.

"I couldn't even figure out what health care I could offer without it being a problem," says Hartnett, whose company is based in Alexandria, Va.

Her solution was to stay a very small business, with just a handful of freelancers. She's turning down offers of business.

"'I'm going to ratchet it down for a while,"' she says.

Reducing payroll, service

If health insurance for the employees at Havana Central's four restaurants becomes too expensive, owner Jeremy Merrin may have to limit the number of people waiting tables and stop delivery service.

He has about 500 workers, and provides insurance for more than 100 of them. He pays between 20 percent and 80 percent of the premiums, depending on how long employees have worked for him.

When there are openings on the wait staff, Merrin is going to see if his remaining workers can handle the dinner crowd without any new hires.

"We're going to work as hard as we can to hire as few people as possible," says Merrin, who has four restaurants in the New York metro area.

That's a strategy many small business owners are considering. In a U.S. Chamber of Commerce survey released last month, nearly a quarter of the owners surveyed said they would reduce hiring in response to the requirements imposed by the ACA.

Merrin is also considering cutting hours. A person who now works 40 might get 36 or 34 hours to help him save on wages. Ending deliveries, which Merrin describes as a marginal part of his business, would save him from buying health insurance for 15 staffers.

Raising prices

Steve Silk is ready to raise the price of Smith Brothers cough drops and health products if insurance for his 65 employees gets too expensive.

Silk isn't worried about turning customers off by charging more. He's part of a group of investors that bought Smith Brothers, a once-popular brand that had languished in dollar stores, and redesigned it for sale in more mainstream retailers. Part of the company's strategy is to have a better product that deserves to have a higher price.

"We'll give consumers a compelling reason to pay more," Silk says.

At Havana Central, Merrin says he will also consider raising prices. But with so much competition from other restaurants in New York, that may not be much of an option.

"There's only so much price elasticity until you price yourself out of the market," he says.

Trimming bonuses

Barbara Morris has 48 employees at her company, Laser Image. She's hoping to hire more staffers, and knows that if she does, that will force her to comply with the ACA.

"We know it's going to be a large item to add to our bottom line. And we keep talking about that, how do we make up for that?" says Morris, president of the Dallas-based company that creates digital sales and marketing systems.

To try to avoid that step, Morris says she'll shop on the health insurance exchange that is scheduled to begin offering plans for small businesses later this year. She's actually looking forward to it.

"That's going to be really fun, to see what the numbers look like, what we're going to get for those dollars," she says.

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